AIG 2009 Annual Report Download - page 93

American International Group, Inc., and Subsidiaries
policies for products liability coverage and for homebuilders. This has led to increased loss emergence relating to
claims involving exhaustion of underlying product aggregates and increased construction defect-related claims activity
on AIG’s excess and umbrella policies. Many excess casualty policies were written on a multi-year basis in the late
1990s, which limited AIG’s ability to respond to emerging market trends as rapidly as would otherwise be the case. In
subsequent years, AIG responded to these emerging trends by increasing rates and implementing numerous policy
form and coverage changes. This led to a significant improvement in experience beginning with accident year 2001. In
2007 and 2008, a significant portion of the adverse development from accident years 2002 and prior also related to
latent exposures, including pharmaceutical exposures as well as the construction defect and product aggregate related
exposures noted above. AIG’s exposure to these latent exposures was sharply reduced after 2002 due to significant
changes in policy terms and conditions as well as underwriting guidelines. Another contributor to the adverse
development during 2007 through 2009 is that actual loss development for other large losses for accident years 1998
and subsequent have emerged at higher than expected levels as compared to the loss emergence pattern exhibited
from earlier accident years. This has caused significant additional development for accident years 1998 to 2002, and to
a lesser extent for accident years 2003 to 2006. In 2009 the vast majority of the prior accident year development was
attributable to the loss emergence significantly exceeding the historical average for this class of business.
For the year-end 2009 loss reserve review, in response to significantly higher than expected loss emergence, AIG
reviewed the indicated reserves for excess casualty under a variety of loss development assumptions. These
assumptions ranged from long term loss development averages, which utilized all or nearly all of the historical data for
this class, to short term averages which utilized only the latest three to five calendar years of loss development
experience. AIG gave greater recognition to the recent calendar year experience, resulting in significantly higher loss
development factor assumptions for the year-end 2009 loss reserve review. This change in loss development
assumptions increased the excess casualty reserves by approximately $815 million for accident years 2006 and prior.
Additionally, in conjunction with the selection of higher loss development factors described above, AIG assigned
greater credibility to the emerging loss development factors for product aggregate-related claims, which are reviewed
separately. This resulted in an increase of approximately $195 million in reserves, primarily for accident years 2000
and prior. In the 2008 review of the product aggregate-related loss development, only partial credibility had been
given to the emerging loss development experience for product aggregate-related claims. Finally, AIG claims staff
updated its review of accounts with significant exposure to construction defect-related claims. This resulted in an
increase of approximately $65 million.
For the year-end 2008 loss reserve review, AIG claims staff updated its review of accounts with significant exposure
to construction defect-related claims. In response to the continued upward developments on these claims, and based
on an updated analysis of this development, AIG increased the reserves by an additional $75 million beyond the
increases identified in the claims review. In response to the continued adverse development of product aggregate
related claims during 2007 and 2008, AIG’s actuaries conducted a special analysis of product aggregate-related claims
development, resulting in an increase in the IBNR reserve for this exposure of $175 million. In response to the high
level of pharmaceutical related claim emergence during 2007 and 2008, AIG claims staff reviewed the remaining
exposure, and based on this review an additional reserve of $10 million was established. In response to the much
greater than expected actual loss emergence for other large losses for accident years 1998 and subsequent during 2007
and 2008, AIG’s actuaries increased the loss development factor assumptions for this business, resulting in a further
increase of approximately $200 million in loss reserves for this class. In total, the specific increases in reserves related
to these items increased the excess casualty reserves by approximately $460 million during 2008, of which $370 million
was recognized in AIG’s fourth quarter 2008 results. In the first three months of 2008, AIG also recognized
approximately $200 million of losses relating to MTBE, a gasoline additive, which primarily related to excess casualty
business from accident years 2000 and prior.
For the year-end 2007 loss reserve review, AIG claims staff updated its review of accounts with significant exposure
to construction defect-related claims. AIG’s actuaries determined that no significant changes in the assumptions were
required. Prior accident year loss development in 2007 was adverse by approximately $75 million, a minor amount for
this class of business. However, AIG continued to experience adverse development in this class for accident years 2002
and prior, amounting to approximately $450 million in 2007. In addition, loss reserves developed adversely for
accident year 2003 by approximately $100 million in 2007 for this class. The loss ratio for accident year 2003 remained
85 AIG 2009 Form 10-K